Abstract
The foreign tax credit has been a cornerstone of the United States international tax system since as early as 1919. However, there have been a number of recent developments in the international tax landscape that warrant a significant revision to the foreign tax credit rules as they apply to controlled foreign corporations (“CFCs”). In particular, the current global tax deal known as the OECD/G20 Inclusive Framework, Pillars One and Two, may cause the United States to lose significant tax revenue if changes are not made to international tax rules, including the foreign tax credit. Thus far, the United States has shown little political will to implement either Pillars One or Two, but dozens of countries have passed legislation implementing the Pillar Two global minimum tax as early as 2024 or 2025 that will impact U.S. multinationals, and many more are poised to do so. Additionally, changes to the foreign tax credit rules, along with changes in the taxation of the foreign income of CFCs as part of the 2017 Tax Cuts and Jobs Act (“TCJA”), as well as new foreign tax credit Regulations (the “2022 Regulations”), have reopened a number of debates and controversies about the operation of the foreign tax credit. These pressure points indicate it may be time for more comprehensive reform of the U.S. foreign tax credit rules.
At a basic level, the current regime allows a credit, up to the U.S. income tax rate, for foreign taxes that are income taxes and that are imposed on foreign source income. One of the main issues raised in the controversy of the 2022 Regulations is the definition of an income tax. To avoid such definitional problems, as well as planning opportunities presented by the current rules, reform proponents have identified several possible options for reform. Among these options are: “grading,” or allowing partial credits for different types of taxes; “leveling down,” namely eliminating the foreign tax credit and permitting deductions for all foreign taxes of every type (income and non-income) as costs of doing business; “leveling up,” making all foreign taxes of every type creditable, even non-income taxes; and “deconstructing,” or taking apart each tax into income and non-income parts and crediting only the income tax part. Building on this prior work, this paper argues for a modified leveling up approach. Given that the international community as a whole is set to adopt new taxes of questionable creditability, U.S.-based multinational entities (“MNEs”) would be left at a significant disadvantage were the U.S. to completely deny creditability to these new taxes. Specifically, this paper argues that the U.S. can maintain the current rate of corporate taxation at 21%, with no deferral, by allowing a deemed paid credit of 15% of worldwide income for any tax paid by a domestic corporation or CFC. The domestic corporation or CFC would not have to demonstrate that the tax was an income tax. For taxes in excess of the 15% rate, the income tax status of the tax would have to be proven. However, a broader definition of income tax would be adopted similar to the definition prior to the adoption of the recent regulations and incorporating certain new taxes under Pillars One and Two.
Recommended Citation
Duxbury, Andrew; Grossberg, Jonathan D.; and Tokic, Genevieve
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"Reforming the Foreign Tax Credit, Subpart F, and GILTI in Light of Pillar Two,"
Akron Law Review: Vol. 58:
Iss.
1, Article 1.
Available at:
https://ideaexchange.uakron.edu/akronlawreview/vol58/iss1/1